Nursing Home Choice, Family Bargaining and Optimal Policy in a Hotelling Economy

The family plays a central role in decisions relative to the provision of long term care (LTC). We develop a model of family bargaining to study the impact of the distribution of bargaining power within the family on the choices of nursing homes, and on the location and prices chosen by nursing homes in a Hotelling economy. We show that, if the dependent parent only cares about the distance, whereas his child cares also about the price, the mark up rate of nursing homes is increasing in the bargaining power of the dependent parent. We contrast the laissez-faire with the social optimum, and we show how the social optimum can be decentralized in a first-best setting and in a second-best setting (i.e. when the government cannot force location). Finally, we explore the robustness of our results to considering families with more than one child, and to introducing a wealth accumulation motive within a dynamic OLG model, which allows us to study the joint dynamics of wealth and nursing home prices. We show that a higher capital stock raises the price of nursing homes through higher mark up rates.